Windstream Corporation Q4 2008 Earnings Call Transcript

| About: Windstream Holdings, (WIN)

Windstream Corporation (NASDAQ:WIN)

Q4 2008 Earnings Call

February 4, 2009 08:30 am ET


Jeffery Gardner - President & CEO

Brent Whittington - Executive Vice President & CFO

Robert Clancy - Senior Vice President & Treasurer


Michael Rollins - Citigroup

Michael Nelson - Stanford Financial Group

Thomas Seitz - Barclays

David Barden - Banc of America

Mike McCormack - JPMorgan

Jason Armstrong - Goldman Sachs & Co

Jason Frasier - Raymond James

Barry McCarver - Stephens Inc.


Welcome to the fourth quarter 2008 Windstream Communications earning call. All lines are placed on mute. We would now like to introduce our speaker, Rob Clancy, Senior Vice President and Treasurer. You may begin, sir.

Robert Clancy

Thank you, Chadra, and good morning everyone. We appreciate you joining us this morning. Today’s conference call was preceded by our fourth quarter 2008 earnings release, which has been distributed on the newswires and is available from the “investor relations” section of our web site. Today’s conference call should be considered together with our earnings release and related financial information.

Today's discussion will include certain forward-looking statements particularly as they pertain to guidance and other outlooks on our business. Please review the Safe Harbor language found in our press release and in our SEC filings which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

Today's discussion will also include certain non-GAAP financial measures. Again we refer you to the IR section of our web site where we have posted our earnings release and supplemental materials which contain information and reconciliation for any non-GAAP financial measures.

During the fourth quarter, Windstream completed the sale of our wireless business to AT&T for approximately $60 million in cash. Accordingly, we have presented the operating results of the wireless business again this quarter as discontinued operations, which includes the incremental tax expense related to the taxable gain on this sale.

Finally, we’ve provided our pro forma results from current businesses, which include VALOR and CT Communications and exclude our publishing and wireless business for all periods. We will make references to these pro forma results from current businesses including the year-over-year comparisons during our call.

Participating in our call this morning are Jeff Gardner, Windstream President and Chief Executive Officer; and Brent Whittington, Windstream Executive Vice President and Chief Financial Officer. At the end of the call, we will take a few questions. With that, here’s Jeff Gardner.

Jeffery Gardner

Thank you, Rob, and good morning everyone. Let me start with a few comments about 2008 and then review our fourth quarter operational results. Brent will then cover our financial performance and our 2009 guidance.

First, let me say that I am extremely proud of the entire Windstream team for all that we have accomplished in 2008, particularly amid a difficult economic environment. We continue to lead the RLEC industry in many key operational metrics and once again we met the financial goals we set forth a year ago. A real tribute to our teams focus and ability to manage this business to sustain free cash flow.

Additionally, we completed the integration of CT Communications and exceeded the operating and capital synergies originally targeted. During 2008, Windstream generated 763 million in free cash flow, an increase of almost $100 million year-over-year, largely due to managing the core business to flat over (inaudible) growth, lower capital expenditures and reduced cash CapEx.

Our dividend payout ratio was 58% for the year and we returned $645 million or 85% of our free cash flow to shareholders in the form of dividends and share repurchases in 2008.

Operationally, our team continued to focus on expanding our sales and distribution channels, with an emphasis on multiple dwelling units and other alternative channels. We continue to make improvements in the quality of our broadband offerings by deploying ADSL2-plus in early 2008, which essentially allowed us to double the broadband speeds offered and to introduce a 10 to 12 mg product.

Additionally, we enhanced our core IP network, which provides IP interconnection between all of our major markets and access to the internet, thereby increasing our overall capacity and providing a platform to offer advanced data services going forward. Collectively, these initiatives positioned Windstream well competitively and enabled additional revenue-generating opportunities in the future.

Turning to a few specifics on our fourth quarter operational results. We added 16,000 new high speed internet customers this quarter, bringing our total customer base to nearly 979,000, an increase of almost 12% year-over-year. Our overall broadband penetration is now at 32% of total access lines and residential broadband penetration is approximately 49% of primary residential lines.

While broadband growth is slowing, in part due to our higher penetration, we are pleased with the increase in new customers subscribing to 3 mg speeds and higher, which was almost 70% of gross adds in the fourth quarter. This, combined with customers coming off promotional pricing resulted in a lift in broadband ARPU during the fourth quarter.

We added nearly 23,000 digital TV customers in the quarter, bringing our total customer base to approximately 274,000, or 15% penetration of primary residential lines. We are pleased with the progress we continue to make selling and bundling the dish product, which meaningfully improves overall customer retention.

During the quarter, access lines declined by approximately 48,000, and we ended the year with approximately 3.04 million customers. This represents a decline in total access lines of 5.2% year-over-year. Although this year-over-year line loss is up sequentially, we continue to lead the RLEC industry, which is a function of the progress we have made in increasing our alternative distribution channels as well as great execution on retaining customers.

During the fourth quarter, we did see an increase in non-paid disconnect, coupled with a slower sales environment, which is likely related to the weakness in the broader economy. Even with this incremental pressure on access lines, we delivered strong free cash flow, which our model is all about.

We ended the year with cable voice competition at roughly 60% of total access lines, which is up from 50% at the end of 2007. We expect the pace of new competitive launches to slow from previous years and the proactive steps we have taken to expand our distribution channels, improved customer service levels and increased our retention efforts will fortify our competitive position.

We ended the quarter with just over two million long distance customers, representing 66% penetration of total access lines. We experienced disconnects during the quarter primarily related to low usage and out-of-territory customers. We are increasing the penetration of our long distance packages, which led to a slight increase in long distance revenue year-over-year.

Our business channel continues to perform exceptionally well, with revenue growth driven by expansion of broadband, next generation data services and special access.

From a regulatory and legislative perspective, we support the administration’s focus on expanding high speed internet access and are hopeful that the program will include a combination of grants and tax incentives with provisions to expand service to un-served rural communities.

We also continue to support comprehensive reform of the current inter-carrier compensation rules, including uniform rates for all traffic that will allow carriers to invest in their networks and bring additional services to rural America, and we look forward to working with the new FCC to achieve meaningful reform in these areas.

Strategically, we continue to believe that consolidation makes sense in this industry. It is important that we stay focused on delivering solid operational metrics and financial results so that we will be well-positioned if strategic opportunities that are in the best interest of our stakeholders come along.

Additionally, we remain confident that the business will continue to produce strong cash flows. Given the current economic and credit environment, we plan to preserve our liquidity and may opportunistically consider other free cash flow accretive initiatives with a bias towards debt repurchases.

In summary, we are pleased with our results for the fourth quarter 2008. Windstream continues to perform well, demonstrating the defensiveness of our business in one of the worst economies in decades, as well as the hard work and dedication of our entire team. Looking to 2009, we will continue to focus on our sales and marketing initiatives to improve our competitiveness. While we expect broadband unit growth to slow, we will focus on achieving incremental revenue by selling faster speeds and other complementary broadband services

Additionally, we have taken aggressive steps to improve our overall cost structure. While we may not be completely immune from the broader economic challenges, we believe our business is well positioned and we remain confident in our ability to sustain cash flows over time.

Now let me turn the call over to Brent to discuss the financial results.

Brent Whittington

Thanks, Jeff, and good morning everyone.

For the fourth quarter on a GAAP basis, Windstream achieved consolidated revenue of $778 million. Operating income of $277 million and $0.19 of diluted earnings per share. Our GAAP results include the following items, which lowered EPS by $0.06: a loss of $10 million in discontinued operations primarily related to the taxable gain and related tax effect of the sale of the wireless business; severance charged of almost $4 million on an after-tax basis related to the head count reduction we completed during the quarter; and a non-cash adjustment to defer taxes of $14 million related to a restructuring of our corporate entities completed in 2008.

Let me turn to our pro form results from current businesses. For the quarter, Windstream achieved consolidated revenues of $778 million, a decrease of 2% year-over-year. And, consolidated OIBIDA of $401 million, a decrease of 3% year-over-year, which includes approximately $6 million in restructuring charges. Excluding these changes, OIBIDA was roughly $407 million, a decline of 2%.

Operating income for the quarter was $277 million. Within our wireline segment, total revenues were $764 million, a decrease of 2% year-over-year, largely due to continued declines in access lines. Long distance revenues increased $1 million year-over-year driven mainly by continued sales of our long distance package offerings.

Data and special access revenues increased $19 million or 10%, the result of additional high speed internet customers and growth in our data products. Switched access and USF revenues declined $11 million year-over-year or 7%, driven by a decrease in switched minutes related to the reduction in access lines.

In addition, since we migrated to a price cap form of regulation on July 1st of this year, we have eliminated the broadband surcharge previously assessed on high speed internet customers. While this is OIBIDA neutral, given the corresponding decline in expense, this change did result in $3 million of lower USF revenues this quarter.

Miscellaneous revenues declined by $8 million year-over-year, half of which was related to the termination of certain network management services that we provided to Altell since the spinoff in 2006.

Turning to expenses, this quarter wireline cash expenses declined by $5 million or 1½% year-over-year and to the lowest level we have seen in almost three years, even when considering the $6 million of restructuring charges I mentioned earlier. In fact, if you exclude those restructuring charges, cash expenses are down nearly 3%.

This improvement resulted largely from lower cost of services, which decreased $13 million or 5%, both sequentially and year-over-year, and was attributable to several factors including reduced overtime and lower fuel costs offset somewhat by higher bad debt expense and certain one-time expenses reported in the fourth quarter of 2007.

Cost of products increased $4 million year-over-year due to PC sales. Within SG&A, expenses decreased by $2 million or 2% year-over-year, largely related to lower advertising spend during the quarter. For the fourth quarter, wireline OIBIDA was $401 million, a decrease year-over-year of $12 million or 3%, driven primarily by the $6 million in restructuring charges with the remainder related to revenue declines. Excluding the restructuring charges, wireline OIBIDA declined 1% year-over-year.

In our product distribution business, revenues were $69 million, a decline of roughly $11 million, largely related to internal sales. This quarter, we spent $98 in capital expenditures, bringing our year to date spend to $317 million. And, as Jeff mentioned, we generated $763 million in free cash flow, defined as net cash from operations less capital expenditures, which is an increase of 14% year-over-year and represents a 58% dividend payout ratio.

From a balance sheet perspective, we ended the year with $297 million in cash, which included approximately $60 million from the sale of the former CT wireless business to AT&T in November. Our net leverage ratio was 3.1 times.

For the full year, we generated consolidated revenue of $3.2 billion, a decrease of 1.5% year-over-year. OIBIDA totaled $1.64 billion, down $11 million or 1%, primarily due to additional restructuring charges that I mentioned earlier as well as the of the revenue associated with the network management services provided to Alltel.

Early in 2008, we provided the investment community with guidance on revenue, OIBIDA and capital expenditures for Windstream and our initial guidance included the expected contributions of the wireless business.

We also lowered our capital expenditure guidance midway through the year and we’re very pleased to report that we met the guidance ranges in all categories for 2008 and importantly achieved nearly flat OIBIDA year-over-year, which is a remarkable accomplishment particularly in this very difficult economic environment.

Let me now make a few comments about the funding status of our pension plan. And, we mentioned this on our third quarter call. As of January 1, 2008, our pension plan assets were approximately a billion dollars and our pension plan was over funded, which means we are not required to make any cash contribution in 2009, although we could elect to make a voluntary contribution.

Like many pension plans, we experienced a significant decline in our asset values in 2008. Based on preliminary estimates, we believe our pension asset value is slightly above 80% of the funding target and, therefore, we do not expect to make a voluntary contribution during 2009. However, we will incur a significant increase in non-cash pension expenses in 2009 which will cover momentarily.

We do expect to make a cash contribution in 2010 of approximately $20 to $25 million net of taxes as a result of these declines.

For 2009, there are several variables to consider in connection with our annual guidance. First, we continue to expect declines in voice and switched access revenues, but we also expect these declines to be mostly offset by the continued growth in our data and special access revenues. Additionally, we expect to receive lower USF revenues related primarily to the conversion of price cap as these revenue streams are now largely based on access lines and not our costs.

We also expect a decline in overall cash expenses year-over-year as we continue to focus on improving our cost structure. As I mentioned earlier, given the difference between our pension assets and expected liabilities, we will experience a significant increase in non-cash pension expense. This increase reflects the negative plan returns in 2008 as well as Windstream’s accounting methodology, which accelerates recognition of the effects of large changes in plan asset valuation. Specifically, we expect noncash pension expense to increase approximately $90 million in 2009, as compared to 2008. But importantly this pension expense will be a noncash charge and will not affect our free cash flow.

With this in mind, we expect 2009 revenue to be within a range of minus 4% to flat year-over-year or specifically a range of $3.045 to $3.170 billion. We expect an OBDA decline of between 4% and flat excluding the additional non-cash pension expense and a decline of between 9% and 5% year-over-year when factoring in the additional non-cash pension expense that I just mentioned. Specifically, we expect OBDA of $1.485 to $1.550 billion, which again includes $90 million of increased non-cash pension expense.

Finally, we expect to spend $290 to $320 million on capital expenditures. Our guidance assumes net cash interest of roughly $395 million in cash taxes in the low 30% range, which does not contemplate any potential benefits from the current stimulus packages being discussed in Washington. With all of these variables, we expect to generate $685 to $755 million in free cash flow, resulting in a dividend payout ratio between 58 and 64%.

In summary, we are very pleased with our results from both the fourth quarter and full year 2008. During 2009, we expect to see some effect from the greater macroeconomic challenges. However, despite this, we believe the business is well positioned to succeed and continue to generate sustainable cash flows throughout the year.

With that, we’ll now take a few of your questions. Operator, if you could please review the instructions and open the call to questions now. And, thank you.

Question-and-Answer Session


Thank you. (Operator instructions)

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. It was encouraging to see the guidance, especially for free cash flow for 2009. A couple of questions off that. Firstly, CapEx is now down about 10% of revenues and you say it could be flat to down say another 10%.

Could you give us a sense of what you think maintenance CapEx is? Already, you know it’s about as low as we’ve seen historically for the Telco sector and the RLEC certainly will be able to squeeze more out of CapEx, but what are sort of the buckets of that?

And, then secondly I think these results contrast with some of the wireline results we saw out of the Bells last week and they’ve got a different mix of enterprise and some Telco TV and so forth, but perhaps you could just talk about what you see as the differences in your business mix.

Is it because you're more rural? Is your business customer base different? Is it your exposure to LD is lower? How do you account for your sort of ability to sort of hold margins much more stable than the bigger Bells on the wireline side? Thanks.

Jeffery Gardner

Sure. Simon, good morning, and thanks for the questions. Brent, I’d like you to take the CapEx question and I’ll answer the questions on the difference between us and the RBOCs.

Brent Whittington

Yeah, well, the CapEx, I mean, we continue to make improvements just overall on how we make decisions about spending around CapEx. I mean, that was one of the reasons we updated guidance throughout the year. And, I continue to get more and more focused on that as we move into 2009. Our numbers are right around 10% of revenue, which I think is a sustainable number for us going into the future.

Our percentage spend directed toward maintenance and build out hadn’t changed materially in the past, which is still a lot of different ways to kind of quantify what you’d call maintenance, but we typically attribute that to about 75%. But, if you think about what’s changed in the business over the last few years, we’re devoting less capital to built out of our broadband infrastructure. You know, we’ve largely got that complete now, addressability to almost 88%. Continue to invest in upgrading our network and the outcomes of that you saw last year with ADLS2-plus.

There’s no question that in this year and I’m factoring it into our guidance in next year, we’ve seen some softness in subdivision build out that’s probably helping to the tune of $10 to $20 million, but nothing more significant than that. So, we’re comfortable with the guidance for sure and I think our teams just continue to get better about the management of that number.

Simon Flannery - Morgan Stanley

Thank you.

Jeffery Gardner

To the second part of the question, I think there are pretty significant differences between Windstream and how the RBOCs are performing. And, it’s mostly around the fact that we’re a rural telephone company. That’s what we focus on 100% of the time. We have very significant differences in terms of residential access line losses. This is something that we spend a good bit of time on in terms of trying to figure out better ways to reach our customer, to build distribution channels, and we have not ever at Windstream taken for granted that access line losses are a given.

We’re disappointed to see a slight uptake this quarter, but we’re really focused on driving better access line performance over time. So, I think that it’s just a real area of emphasis for us.

And, with respect to the Enterprise customer, about one-third of our business, just over a billion dollars of our revenue streams , are related to the Enterprise customer. We have seen very little competition in our markets. We’ve become very targeted with respect to selling bundles to our business customers, working to sell high-speed data products and I think again that’s a very big difference in terms of the markets that we’re in. Windstream’s access lines per square mile are under 20. And, so again, slightly less competition.

I think the rural thesis that investors really believed in when we put this company together is that rural, rural carriers will have less competition and, thus, will be in a better position to maintain cash flows over a long period of time and I think that’s absolutely playing out. When you look at what we went through in 2008 with respect to the economy and producing numbers that generate 14% growth and free cash flow, I think that just illustrates the strength of the model

Simon Flannery - Morgan Stanley

That was very helpful. Thank you.


Thank you. Your next question comes from the line of Michael Rollins, Citi.

Michael Rollins - Citigroup

Hi, good morning. Just a question on operating leverage. I was wondering if you could give us an update? As you look at just the Telco business to take out product distribution, if you lose a dollar of revenue, how much cash flow on average is lost from that? And then as you think about some of the initiatives you talked about on the call earlier, is there room for more aggressive cost cutting or further LV price increases to help fight against that negative operating leverage? Thanks.

Jeffrey Gardner

Michael, I guess when you lose a dollar of revenue, how much in cost can you take out is a tough question to answer because it depends on the type of revenue, but I mean if you look overall last year, you know, we lost revenues predominantly from the voice side of the business. We continued to grow LD, broadband was a great story, and I think everyone understands the pressure on the wholesale revenue stream.

So, as you start looking at variable cost, you know, when your business is declining and you're losing some access lines, many of your cuts are variable. And, I mean, those are the levers we continue to focus on. There aren’t what I’d call big kind of opportunities for cost reductions.

It’s a lot of little things across the board. That’s what our team stayed focused on throughout the year. You know, we got focused on that at the beginning of the year knowing the challenges we’re going to face and it’s something that we do well. You really saw that show up in the fourth quarter. We had some head count reductions we had to announce preparing for 2009, adjusting our cost structure to be more in line with the customer counts we were seeing at that time. In addition, we're continuing to make improvements in our cost structure.

Even if you look at our 2008 year versus 2007, pressure on revenue not withstanding, we

still were able to grow margins. So I think that’s a testament to the amount of variable costs that you’ve got to help offset that pressure.

Michael Rollins - Citigroup

Great, thank you.


Our next question comes from the lines of Michael Nelson, Stanford Financial Group.

Michael Nelson - Stanford Financial Group

All right, thanks for taking the question. Jeff, in your prepared remarks you mention your distribution network. Can you talk about what you’re doing differently? How you’re using your local agent network?

Your retail stores, door-to-door marketing, and does that entail any increased costs? Also, given the current economic environment, what are you doing differently on your save desk and how do you position to (inaudible) thanks.

Jeffery Gardner

Great question. On distribution, we’re doing a number of things there. First of all, the retail channel’s been there for a long time, and we’ve really brought to bear some better performance management around the retail channel, really getting focused on managing that channel to increase its share of our total gross gain, and we’ve seen increases this year. So that traditional channel has become more productive.

The other big things there that I’d like to talk about, yeah, the local development is an important focus of ours, but still relatively a small part of our distribution network. But it’s something that we are still encouraged that could offer us some potential down the road.

Door-to-door has been perfectly effective when we’ve got an aggressive offer in the marketplace. It allows us to compete head-to-head with our cable competitors in those markets, and we’ve used those much more aggressively this year.

We’ve picked the markets where that’s most effective, which tend to be our most competitive markets. We do some of that internally with internal door-to-door sales people, and some through third party and we’ll continue to do that throughout 2009.

The other area that we’ve become very focused on, because in our top six markets—our urban markets if you will, or suburban markets—those markets have been particularly challenging over the last three years for us, and mostly, a large part of that relates to a high number of multiple dwelling units in those markets.

And so for the last 18 months, we’ve been very focused on developing that multi-dwelling unit approach in the marketplace; hiring some people in the field, we have invested in these alternate channels, but we’ve done it, as you’ve seen, while maintaining our margin. And so I think our challenge is to continue to find ways to build gross gain.

On the retention side, we’ve continued to work with customers to make sure that they understand what makes the most sense for them. So if we get an unbundled residential-line customer calling in, we’re going to make them aware of a bundled price that may work for them given their hard times.

Folks are looking at ways to reduce their expenses; we’re trying to make sure that they’re on our absolute best plan. So I think with retention, that’s an area where we’ve invested heavily this year as well. Not only from the resources that we have to answer the phones, but really on performance management, so the managers can stay very much focused on what trends they’re seeing.

You’re absolutely right, the reasons for customers calling in these days, are much more around controlling their bill. So we’re equipping those folks with tools to really get to those issues, so the customers may not walk away with a lower bill, but will walk away feeling better about the value they’re getting from Windstream. I think it’s a combination of all those things.

Michael Nelson - Stanford Financial Group

Great. Thank you.

Jeffery Gardner

You’re welcome.


Your next question comes from the lines of Tom Seitz, Barclays.

Thomas Seitz - Barclays

Hi, thanks for taking the question. Maybe Jeffery, you first, can you give us an update on the integrated set top box, when we might see it. Whether or not it’s an RPU opportunity for you, or whether you are viewing it basically the way you’re viewing the current satellite offer and it’s a term reduction opportunity.

And then Brent, can you let us know if there’s going to be any impact at all to special access from the Altell/Verizon merger? I mean do you move to a master contract with Verizon that maybe has rates that are different then what was going on with the Altell? That’s it.

Jeffery Gardner

Okay, thanks Tom. With respect to the set top box, I can’t be specific as to when that will be deployed in the marketplace at this point in time. But I think to the broader question, really, what our challenge is; we are in a great position with 49% of our residential customer base already subscribing to our broadband product. That’s a huge position for us in the marketplace. Our challenge now is to get busy with other products and services to monetize that broadband connection.

Our DISH penetration is up to 15%, so together, I think that’s a really strong combination. We’re going to be doing a lot of things like selling security suites, selling our home networking product, tech help to provide computer support to our customers, working internally and with third parties to really focus on monetizing that broadband connection, and at the same time, finding ways where we do have the triple play, to really take advantage of that so that customers can use their broadband connection to manage their video viewing products, and we’re looking at a number of services in that area in addition to the set top box.

Thomas Seitz - Barclays

Are these first half initiatives generally speaking? Or second half initiatives just—

Jeffery Gardner

Yeah, we’ve got a number of these going on right now, and throughout the year we’re going to be trialing a couple of new services, so I think it’s going to be first half, and then really the whole game in respect to broadband, that’s really what our business is going to be all about for the next few years, is focusing on a continuing stream of products designed to monetize that broadband connection.

Robert Clancy

Tom, let me address your question on special access. There are really two things that we have to consider there in that merger. I mean, you’ve got kind of a rate issue and a volume issue.

The rates, those are at (inaudible) rates today, so we don’t expect really any pressure from that. As it pertains to volume, yeah, to the extent there’s any network grooming and redundancy, you know, there on circuits that aren’t fully utilized, there could be some impact. We factored that into our guidance this year, and don’t expect that to be significant enough, such that we’re going to have to be talking about it.

Thomas Seitz - Barclays

Okay great. Thank you very much.


Your next question comes from the lines of David Barden, Banc of America.

David Barden - Banc of America

Hi guys, thanks for taking the question; maybe two if I could. First, this is kind of the first major role player to kind of announce results. What are you guys assuming, or how we, as investors, think about the broadband stimulus plans that are being bandied about, impacting a company like Windstream?

Does it potentially mean higher CapEx that you get back in tax rebates or customer subsidies leading to higher take rates for broadband in rural areas? Does it really have any impact online at all? Or is there just so much in the air you just can’t comment?

I guess the second question, if I could, is that I think ever since you guys were singled out in the Wall Street Journal for having been involved in M & A talks, one of the larger overhangs on the stock remains a belief that the moment that that market opens up, you guys will be looking to execute on a M & A transaction.

I guess if you could speak to kind of where you’re headed at now, and how eager you are to consolidate in order to preserve growth versus how content you can be, kind of doing what you do every day would be helpful. Thanks.

Jeffery Gardner

Sure. David, first on your broadband question with regard to the stimulus package. We’re very encouraged that the new administration seems to be very focused on ruled broadband. We haven’t factored any impact from that into our 2009 plan at this point in time, but I think because we’re unsure as to whether it’s going to be tax credits or subsidies for customers, I think there are a couple of areas.

We would love to find a way, an economic way to reach out beyond our 88% availability that we have today to drive better broadband penetration rates, especially in rural America.

So I think it’s ultimately going to be a net positive, how much of that will impact 2009 is hard to say, but I would just say at this point, we believe its upside. We’ve been working very hard with the new administration to really put forth our ideas on what might work best.

Not only is there an opportunity to reach out to that last 12% of our customers who can’t get broadband through Windstream today, but also this subsidy issue that you raised. There’s many customers who are in our footprint today who simply can’t afford it, and that’s a big opportunity as well.

With respect to M & A, we still believe, as I said, that consolidation makes sense. Are we waiting to jump on something immediately when the debt markets open up? I think that’s overstate. We’ve always said, what we’re trying to do from a long-term perspective here is to look for transactions that are pre-cash flow appretive to our shareholders, and do deals that make sense for our shareholders and kind of fit our long-term view of the industry.

Having said that, if no deals come about, I think we’ve got a real strong business here that’s of a scale and a scope. You’ve seen what we’ve done in our first three years, we’ve managed our OIBDA very aggressively. And so I think the best way to think about it is that if Windstream finds an opportunity, where we think we can drive cash flow apprecian, and improve the long-term return outlook for our shareholders, we’re going to do it.

But it’s not something that we absolutely have to do to continue to produce the kind of results that you’ve seen from us over the last few years.

David Barden - Banc of America

I appreciate those comments. If I could just quick follow up with one, it’s just on the buy-back which is scheduled to be completed this year. Obviously, you’ve said you have a bias towards debt repurchase. Could you just comment on whether you’re still committed to conclude the buy-back by the end of the year?

Brent Whittington

You know David, to say we’re committed to conclude the buy-back I think would be tough. I mean as we’ve kind of indicated, right now we’re favoring debt repurchases, but as much as anything, we’re protecting our cash.

We’re not real sure when the market will settle out with the long-term cost of capital on either a debt or the equity side is going to look like, and so as opposed to rushing out and letting go of that cash and making some short-term decisions, we’re being a little patient before we deploy that cash.

So I think I’d be hard pressed to say we’re committed to fully executing it. It still remains in our tool kit, and it’s something that will still get consideration as we progress throughout the year.

David Barden - Banc of America

Alright guys, thanks a lot.

Jeffery Gardner

You’re welcome, and I’ll just add to that, that it is not our intent to accumulate cash indefinitely, but I think all of you can agree that the markets that we’re seeing today are pretty unprecedented, so we believe, as Brent said, it’s in our best interest to accumulate cash in the short run and continue to look at these creative opportunities over time, but we’ll look at that as we see this kind of economic situation evolve over the next quarters and months.


Your next question comes from the lines of Mike McCormack, JPMorgan.

Mike McCormack - JPMorgan

Hey guys, thanks. Brent, maybe just a follow up on that last question on debt. Maybe give us a sense of what you’re looking at there. I mean the term loan I guess comes due and in 2011 you’ve got the revolver out there as well.

But even with paying down those instruments, it seems like the cash gets pretty significant. So with a North of 11% equity dividend yield, doesn’t it make some sense to have a more balanced approach on that?

And secondly, on DNA guidance for 2009, can you give us a sense for why that’s up year-over-year and how we should be thinking about that maybe a little bit longer term?

Brent Whittington

Okay. On the debt, I mean yeah, I mean your math’s right, and in terms of our maturities through 2011, we feel very good about that, and I don’t want to necessarily say what specific debt instruments we might look to buy back, but certainly our bank debt and early in December, frankly, our bonds as well that have come back. Both look like the pricing there was very favorable. So I’d say that’s still, in terms of a consideration in what we’re thinking.

As it pertains to D & A, I think we just need to get back to you on that. I’m not sure about any specifics that you’re looking for there, but it’s only about $2 million, so I don’t think it’s a significant item at all Mike. We can follow up on that later if that’s okay?

Mike McCormack - JPMorgan

Yeah, that’s fine, I’m just looking at the CapEx number versus the D & A number, and it continues to trail by a wide margin, so I’m just thinking that it might have some sort of collapse over some period of time.

Brent Whittington

Well yeah, and one thing to think about as it pertains to D & A for us. We follow—it’s just a mass accessive accounting, and so our gross plan is a driver of depreciation as much as anything. So that’s a harder analysis to do given that type of methodology Mike.

Mike McCormack - JPMorgan

Okay, great, thanks Brent.


Your next question comes from the line of Jason Armstrong, Goldman Sachs.

Jason Armstrong - Goldman Sachs & Co

Hey, thanks for that. Good morning. A couple questions, you guys mentioned an uptick in non-paid disconnects in the quarter. I’m just wondering if you could give us a little more granularity around that through a residential versus small business trend, and then also how that trend did in the quarter. Was it sort of relatively even, or did you see sort of a pickup through the quarter where the exit rates may have been higher then the entry rates?

And then a second question just on pension; the $90 million of 2009 pressure. Can you just give us some more granularity around this just to understand the acceleration? Maybe what the mechanics are, what triggers the acceleration, sort of what the thresholds are.

Then the second part of that, as we think about this sort of eliminating what would generally be a smoothing factor, does this mean the full pressure is built into 2009, and you may bet some relief in 2010?

Brent Whittington

Okay Jason, I’ll take the first part. So MPD’s—we mention that as much as anything, because I think it’s first and foremost on investor’s minds these days. But as Jeff kind of indicated it was slight, and slight to the tune of about 3,000 customers, and not even a high water mark that we’ve seen over the last 24 to 30 months in our business.

So if you look at the timing on that during the quarter, we really saw a little bit of an up kick in November, but it came back down in December, so it’s nothing that we’re alarmed by. Those are trends that happen sometimes, and we’re obviously staying keenly focused on bad debt, but it’s nothing that we’ve got any particular significant concerns about right now.

Now as it pertains to the pension, $90 million in 2009 versus 2008 is a significant increase, which is why we mentioned it separately and even gained OIBDA guidance on a with and without basis.

Our accounting kind of policy, as it pertains to pension, really works like this: Any gains and losses in excess of a corridor of 17.5% are accelerated and/or earnings over a five year period of time. So that’s really the math, and clearly, the market performed overall much worse then 17.5% in this past year.

That’s the reason that you’re seeing such a significant increase in our pension expense on a year-over-year, and that continues for a five year period of time. Now the gains and losses inside that corridor are actually recognized into our earnings more in line with the 12 to 15 year period, so kind of a service period over which the participants in that pension kind of earn that benefit.

So that’s really the mechanics on that, and that’s really the smoothing that you’d see as a result. Changes that you’d see in pension from here on are really going to be a function of where assets go thereafter.

Importantly though, as it pertains to the cash contribution, we have no obligation to make a cash contribution into the pension at 2009. it’s above the 80% funding level, which means no plan limitations for participants, and so the first payment we’ve got to make is in 2010 to help again making up that shortfall. So that’s the math there Jason.

Jeffery Gardner

And just to add Jason, so the big difference here with Windstream is we accelerate the recognition of that over five years, as Brent said, as compared to if we didn’t elect this corridor accounting, which we elected many years ago, a company may take that over 15 years.

So as Brent said, it’s non-cash, it’s more conservative, kind of take the hit over the first five years, but it doesn’t really drive anything from a cash flow perspective in the business. And we believe our pension behaved like everybody else’s in terms of similar losses.

Jason Armstrong - Goldman Sachs & Co

Yes, okay great, that’s really helpful. Thanks guys.


Your next question comes from the line of Jason Frasier, Raymond James.

Jason Frasier - Raymond James

Good morning. It looks like (inaudible) and special access continue to do well in this environment. I was wondering if you could talk about what you’ve been seeing kind of in December and January, the trends there and just your broader thoughts going into the remainder of 2009.

And on the video side, it looks like another quarter of pretty strong ads. Do you guys have any video promos in the quarter? And have you looked at working with a DISH for a joint promo to try to drive it more? (Inaudible). Thanks.

Jeffery Gardner

Sure. I’ll take the first part on the enterprise segment. We were very encouraged with the fourth quarter in terms of what we saw there Jason, with respect to both our sales of high speed data products.

Our CPE sales were very strong, which I think is a good indicator that business customers in our markets were still making capital investment decisions, and should bode well for us going into 2009.

It’s a key part of our 2009 plan to bring products to our business customer that add value, that help them run their businesses better, and really drive performance within their companies, so that these things make sense even in challenging times. So we’re very encouraged with the opportunity in that sector, and again, that represents some 33% of our business.

On the video side, we are now at 15% penetration of our DISH products. This is very high relative to anybody in our space that you look at. We’ve been very effective at selling DISH into our base, and that’s really a credit to all of our sales and marketing team.

We didn’t run anything special, like there was no huge special promotion in the fourth quarter. We always are running some type of promotion, but we didn’t do anything special. And as far as the first quarter, we are partnering with DISH on an offer to kind of kick off the year.

I think there’s a good opportunity with all the movement around going to digital TV. Even if that gets suspended, that’s a good opportunity for us to sell DISH and get people focused on it.

We really believe in DISH. The reason our numbers are so strong in that area is that we place an incredible emphasis within our company on selling the triple play, and it has a huge impact on our turn over the long run.

Jason Frasier - Raymond James

Great. Thank you.

Robert Clancy

Chandra we have time for one more question.


Your next question comes from the line of Barry McCarver, Stephens Inc.

Barry McCarver - Stephens Inc.

Hey, good morning guys. I just made it in. You’ve touched on most of my questions. I did have one more question on the enterprise side. I noticed a couple of days ago you put out a press release announcing an expansion of your agreement with Mytel, and if I understand it, it’s a rolling out that product solution to your entire footprint.

I’m wondering if you could help us monetize what that may mean for enterprise revenue, particularly that you’ve said it’s an important factor in 2009.

Brent Whittington

Barry, you know, Mytel really for us was just an effort at the beginning of the year to have another kind of strong player in our product lineup for business sales team to offer to customers.

CPE—Jeff already kind of alluded to—has been a great success story for us in both 2008 and 2007. Our strategy, from a business standpoint, really revolves around owning that CPE, that kind of equipment relationship with the customer, and the Mytel product lineup, as much as anything, was just an incremental product to give them more tools and more products to sell to their customer base. So I think it really just helps us in terms of having a better lineup with customers.

Barry McCarver - Stephens Inc.

Okay guys, that’s all I had, thanks.

Robert Clancy

We appreciate you folks joining us to—

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